How Much Student Loan Debt is Too Much?
If you have a student planning for college, you are probably aware of the current student loan crisis. In the past, many families have allowed their student to attend a college that is financially out of reach by subsidizing the cost with federal student loans, private loans, and parent loans.
But parents and students should be concerned when applying to college and determining the cost. Financial experts and college planning experts agree the ability to pay for college should be a part of the final decision.
But do the costs outweigh the benefits?
First, let’s look at the statistics. According to data from the U.S. Federal Reserve, Americans are more burdened by student loan debt than by credit card debt. There are 45 million borrowers who owe over $1.56 trillion in student loan debt. That’s about $521 billion more than the total U.S. credit card debt.
Data from the class of 2018 shows 69% of college students took out student loans, both private and federal, graduating with an average debt of $29,800. Parents took out an average of $35,600 in federal Parent PLUS loans to pay for their student’s education.
The average monthly student loan payment (among those not in deferment) is $393. The median monthly student loan payment (among those not in deferment) is $222.
Imagine graduating with a low-paying entry-level job and being burdened with college debt that you are unable to repay.
Why Student Loans?
It’s simple—college is expensive. Without student loans, many families would be unable to afford college.
Student loans were meant to help families decrease the personal financial burden of paying for college while allowing the student to repay them after graduation after obtaining employment . Unfortunately, many students borrow too much and aren’t prepared for the strain it puts on an entry-level salary.
Student loans aren’t “bad”, particularly if borrowed wisely and used to supplement other college funds such as family savings, scholarships, merit aid, and wages earned while working during college.
The key is to borrow only what you need and understand your repayment responsibilities.
How Much Debt is Unreasonable?
In a Washington Post article about college costs and college debt, a few experts weighed in on how much debt is unreasonable. Several agreed that the rule of thumb for total undergraduate borrowing should be limited to what you might expect to make in your first year after graduation.
Mark Kantrowitz is a nationally-recognized expert on student financial aid and student loans contributing articles for the New York Times, Wall Street Journal, Washington Post, and more. He is the author of four bestselling books about scholarships and financial aid. Mark explained, “If total debt is less than annual income, you should be able to repay your student loans in 10 years or less.”
Sara Goldrick-Rab, author of Paying the Price: College Costs, Financial Aid, and the Betrayal of the American Dream and a professor at Temple University, had additional advice. “Debt in an amount that causes the students or the family stress — whether before, during, or after college — is too much debt.”
Andrew B. Palumbo, dean of admissions and financial aid at Worcester Polytechnic Institute, said how much to borrow for college “is an inherently personal decision that is best made after conducting thoughtful research. Students and their parents should know their school’s graduation rate, loan default rate, and the likely return on investment for the major they choose.”
In addition, the amount of debt your student takes on during college should be thoroughly discussed and analyzed before signing on the dotted line. Many college financial aid offices provide loan documents without proper financial counseling.
You and your student must understand the responsibilities and the consequences of borrowing to pay for college.
How Do You Determine Your College ROI (Return on Investment)?
It’s important to calculate the ROI of your student loans. For example, borrowing $200,000 to pay for a degree that promises a starting salary of $40,000 per year would be a poor return on investment. This would be considered high debt for student loans.
As stated earlier, to make things simple, your amount of student loans should be less than your first year post-graduation salary. But how do you know what your potential salary might be?
The Bureau of Labor Statistics Occupational Outlook Handbook is a great online resource to use. You can look up any career along with statistics related to its growth potential and projected need, and find the average starting salary for whatever degree your student is pursuing.
If your student is still undecided, look up the salary for a bachelor’s degree recipient. That should give you a good figure to use when calculating your student’s loan/debt manageability.
You should also consider other debt and maintain a manageable debt-to-income ratio . The student loan payment should be limited to 8-10 percent of the gross monthly income. For example, for an average starting salary of $30,000 per year, with expected monthly income of $2,500, the monthly student loan payment using 8 percent should be no more than $200.
Allocating more than 20 percent of discretionary income toward student loans can overburden your student and make it impossible to repay their loans in a timely manner.
How Do You Calculate Student Loan Payments?
In order to calculate your student loan payments, you must first determine how much your student will be borrowing for college along with the interest rates. All students qualify for federal student loans, and you should always consider these before taking out private loans.
Federal loans allow for deferment and forbearance when necessary whereas the rules for private loan repayment are stricter and the interest rates are higher. These are calculations that might fluctuate over the course of four years, but doing them will help your student stay on track and not borrow more money than they can repay.
There are many loan repayment calculators available, but NerdWallet has an extensive list to assist you with calculating your student loan payments:
- Student loan payment calculator
- Student loan affordability calculator
- Student loan consolidation and refinancing calculator
- Discretionary income calculator
- Average student loan interest rate calculator
Parents and students should have a serious discussion about college financing. With every lender, look at the interest rates, repayment terms and repayment flexibility. Pay attention to the federal loans, especially the ones that are unsubsidized, because the interest will accrue while your student is in college.
With these loans, it’s wise to pay the interest if it’s affordable.
What Are Some Simple Borrowing Rules to Follow?
After evaluating all the statistics and looking at the student loan data, you might be overwhelmed. If so, here’s a simple checklist to follow:
- Do your research (look at salaries, career growth patterns, and loan repayment amounts).
- If necessary, investigate cheaper alternatives (community college, public universities, or work and pay as you go).
- Don’t borrow more than the first-year salary after graduation and consider debt-to-income ratios.
- Borrow only what you truly need for educational expenses.
If you follow these simple rules of borrowing, you should be able to keep your student’s college debt manageable. While student loans can help families pay for college, it’s important to remember over borrowing can lead to crushing debt after graduation.
Long-term debt is not only unmanageable, but will affect your student’s future borrowing potential for major purchases. Be a wise consumer. Do your homework. Look at the figures. Make wise financial choices.
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Suzanne Shaffer counsels parents and students in the college admissions process and the importance of early college preparation. Her Parenting for College blog offers timely college tips for parents and students, as well as providing parents with the resources necessary to help their college-bound teens navigate the college maze.